Answer to Question #155606 in Finance for Hibba Saleem

Question

The house you wish to buy costs Rs.30,000,000. The

dealer has a special leasing arrangement where you pay Rs.1,700,000 today and Rs.450,000 per

month for the next six years. If you purchase the house, you will pay it off in monthly payments

over the next six years at required rate of return of 6 percent per annum. You believe that you

will be able to sell the house for Rs.35,000,000 in six years.

Required to calculate and answer the following :

1. What option will be beneficial for you either buying house in single payment or buying

on lease.

2. Assume you purchase the house in onetime payment and sold it for 35,000,000 after six

years on same interest rate compounding monthly will this be a good and profitable deal

for you.

Answer 1

Answer:

Question 1;

Time Period= 6 years * 12 = 72 months

Interest % = $0.06 \over 12$ = 0.50% ( 6%=0.06)

 

Present Value of Option 1 = -30,000,000

 

Present Value of Option 2:

Present Value of Option 2 = -28,852,781.27

Therefore, option 2 will be beneficial for when either buying house in single payment or buying

on lease.

Question 2;

Investment = 30,000,000

Selling Price = 35,000,000

Time Period = 6 years * 12 = 72 months

Interest % = $0.06 \over 12$ = 0.50%          ( 6%=0.06)

 

Return = $Selling Price \over Investment$$1\over Time Period$ -1

Return =$35,000,000 \over 30,000,000$$1 \over 72$-1

Return = (1.167 ^0.1389)-1

Return = 0.214% per month

 

Hence, the deal is not profitable for us since the realized return from the transaction is less than the required rate of return.